Reliance Steel & Aluminum Co. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Unaudited consolidated results; amounts in U.S. dollars. Comparisons are with the corresponding 2012 periods unless noted.
Business context
Reliance distributes and processes metals. On April 12, 2013, it acquired Metals USA for $766.8 million in cash and assumed $486.1 million of debt, for total transaction value of approximately $1.25 billion. Metals USA contributed $396.5 million of sales from April 13 through June 30 and added 48 service centers. Reliance also acquired Travel Main, a real estate holding company, on April 30.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $2,448.3 million | $2,209.7 million | $4,473.6 million | $4,498.0 million |
| Gross profit / margin | $621.6 million / 25.4% | $569.4 million / 25.8% | $1,150.4 million / 25.7% | $1,147.2 million / 25.5% |
| Operating income / margin | $145.5 million / 5.9% | $186.2 million / 8.4% | $275.5 million / 6.2% | $370.8 million / 8.2% |
| Net income attributable to Reliance | $81.0 million | $108.8 million | $164.7 million | $225.0 million |
| Diluted EPS | $1.05 | $1.44 | $2.13 | $2.98 |
Q2 SG&A was $426.0 million (17.4% of sales), versus $346.7 million (15.7%) a year earlier. Interest expense was $22.1 million in Q2 and $35.2 million for the first six months. The six-month effective tax rate was 31.4%, compared with 33.7%; settlement of certain tax matters favorably affected the 2013 rate.
Cash flow: Six-month operating cash flow was $283.9 million, versus $21.2 million in 2012. Investing cash outflow was $860.5 million, including $794.7 million for acquisitions and $74.3 million of capital expenditures. Financing cash inflow was $581.4 million. Cash ended the period at $100.8 million. Management attributed the year-over-year operating cash flow improvement primarily to lower inventory levels, excluding businesses acquired.
Debt and liquidity: Total debt was $2.338 billion at June 30, up from $1.209 billion at December 31, 2012; cash was $100.8 million. Net debt-to-total capital was 37.6%, versus 23.8% at year-end. Reliance had $600 million drawn on its $1.5 billion revolving facility and $57 million of letters of credit outstanding. It reported covenant compliance, with interest coverage of approximately 8.9 times against a 3.0-times minimum and a credit-agreement leverage ratio of 39.2% against a 60% maximum. The $75 million notes due July 2, 2013 were subsequently repaid using credit-facility borrowings.
Material changes and management commentary
- Q2 sales rose 10.8%, largely reflecting acquisitions, while same-store sales declined 8.4%. For the six-month period, sales declined 0.5% and same-store sales fell 11.1%.
- Sales tons increased 24.2% in Q2 and 9.0% for six months, while average selling prices per ton fell 10.9% and 9.1%, respectively. Management cited lower mill prices, softer activity in most end markets, and one fewer shipping day. Metals USA’s product mix also lowered average selling prices.
- Q2 operating income declined 21.9% and six-month operating income declined 25.7%. Management cited higher SG&A, lower selling prices and margins, partly offset by acquired businesses. SG&A included $9.5 million of Q2 and $12.6 million of six-month non-recurring charges related to the Metals USA acquisition and a facility consolidation; the filing separately identifies approximately $11.4 million of acquisition-related transaction costs for the six-month period.
- Reliance issued $500 million of 4.50% senior notes due 2023 and entered a revised credit agreement with a $500 million term loan, principally to fund the Metals USA acquisition. The term loan and acquisition drove higher debt and interest expense.
- The board declared a Q3 dividend of $0.33 per share, 10% above Q2’s $0.30. Management expects cash flow and revolving-facility capacity to be adequate for debt, working capital, capital spending and growth needs, and to maintain and potentially increase dividends. It expects to continue acquisitions and other growth activities. No quantified earnings or revenue guidance is provided.
Risks, contingencies and unusual items
Management cited exposure to economic conditions, competition, interest and foreign-exchange rates, metals prices, and changes in demand and availability. Construction, energy and related customers can be seasonal; certain months typically have fewer shipping days. The company reported no material change to its previously disclosed risk factors. Environmental remediation obligations relate to former operations of a subsidiary; insurance is expected to cover most costs, and management does not expect a material adverse impact. Goodwill was $1.659 billion and net intangible assets were $1.314 billion at period-end; the 2013 annual goodwill impairment test was scheduled for November 1 or sooner if warranted. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Metals USA integration and acquired sales can offset persistent same-store volume and pricing weakness, and how acquisition-related costs affect ongoing margins.
- Debt reduction, interest burden, refinancing needs and continued compliance with debt covenants following the acquisition; $977.9 million of debt obligations were due before the revolving facility expires in April 2018.
- Whether operating cash flow remains strong as working capital needs evolve; distinguish cash-flow changes excluding acquired businesses from balance-sheet increases caused by acquisitions.
- Performance of end markets, metal prices and inventory valuation, along with the carrying values of substantial goodwill and intangible assets.
- Execution of management’s stated liquidity, growth and dividend expectations, including the effect of future acquisitions and the $39.2 million mortgage lump-sum payment due in October 2016.